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QuestionsCategory: Business QuadrantBusiness model questions
Benjamin Sing asked 7 months ago
  1. We prefer to look for high profit margin, high volume business model. Is there an absolute net or gross profit margin number that we use that tends to correlate with better scalability of business model?
  2. Using Sheng Siong as an example, can I check if this assessment is accurate:

    “My impression is that it is a company that has low margin and high volume. The business is not asset light given that it has to own/lease a substantial amount of retail space for its supermarket outlets. This is confirmed by the fixed asset to total asset ratio in 2021 and 2020 being around 50%.”

  3. Since it is asset heavy (can I say this? Is there a number for the ratio to look for?) and price appreciation since 2011 is only 3-4x, can I say that I would not spend more time analysing this stock as a potential growth stock? Furthermore it is in a defensive, consumer staple industry.
  4. But, Sheng Siong seems to fulfil the criteria of having high FCF/E ratio. I briefly calculated it back to 2017 and it’s >10% consistently. Example calculation for 2021: (172.7-31.7)/413.4=34% is correct? In the context of non-asset light company, is this less relevant when looking for a growth company?


1 Answers
Victor Chng answered 7 months ago

Hi Benjamin,

    1. When looking at margins, I focus mainly on gross profit margin. The company have enough gross margin to deduct the expenses. My benchmark for GPM is at least 20%.
    2. Yes, Sheng Siong is a low-margin business. As for volume, I will say they are only confined within Singapore. Even though Sheng Siong have a  FA/TA of 50%, I will still consider them asset-light because they have a negative cash conversion cycle. They can take the product from suppliers to sell without coming out with cash. Their leases are operating expenses, not fixed assets. (Do note: asset-heavy business are classified as FA/TA of above 60%)

    3. The company is a dividend stock rather than a growth stock since its volume is only restricted in Singapore. I think that they have almost maxed out their potential already. 

    4. As mentioned in point 2, I think Sheng Siong is an asset-light business. Your calculation of FCF/E ratio is correct. 
Benjamin Sing replied 7 months ago

Thanks Victor for the reply! I appreciate the numbers for GPM and FA/TA.

I see, for Sheng Siong geographically operates only in Singapore for now, so volume is low because we naturally don’t have many people. So low margin, low volume business. Thanks for confirming the FCF/E as well.

I do have 1 qn as in the course it mentions “(Note: Fixed assets here refer to property, plant and equipment, biological assets, and inventory.)”. For PP&E and biological assets I think I understand why. I don’t really understand why inventory, in what cases would this be a fixed asset?

Thanks in advance! I have a lot of basic questions.

Benjamin Sing replied 7 months ago

Hmm, another qn is Sheng Siong gross profit margin is ~25% from 2017 to 2021, so why do we still say it is low margin?

Victor Chng replied 7 months ago

Inventory is a fixed asset for a product-based company because it must constantly maintain the inventory level to operate the business. Hence, the money is always locked up in inventory.

For margin level, I look at the net profit margin. Anything less than 10% is a low margin.

Benjamin Sing replied 7 months ago

Thanks Victor!

Ok I must admit I am slightly confused.

My understanding of fixed asset is what is needed to generate revenue, and looking at some common definitions it does not seem to include inventory.

That said, I think I understand why you still include it, as money locked away is money that cannot be used. Moving back to Sheng Siong example with negative CCC, the inventory is actually financed by supplier, so there is no money stuck there (thus exclude inventory).

Perhaps I can say that we take fixed assets as PP&E, biological assets and inventory (if CCC is not negative)?

Victor Chng replied 7 months ago

Yes, you are right about the last sentence.

Benjamin Sing replied 7 months ago

Ok, thanks Victor for your utmost patience!

Victor Chng replied 7 months ago

Welcome :)